QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, For the quarterly period ended September 30, 2012

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 000-26734

SANDISK CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

77-0191793

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

601 McCarthy Blvd.

Milpitas, California

95035

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code

(408) 801-1000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes R

No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes R

No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer R

Accelerated filer ¨

Non accelerated filer ¨

Smaller reporting company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨

No R

Number of shares outstanding of the issuer’s common stock, $0.001 par value, as of September 30, 2012: 241,788,556.

SanDisk Corporation

Index

Page

No.

PART I. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements:

Condensed Consolidated Balance Sheets as of September 30, 2012 and January 1, 2012

These interim Condensed Consolidated Financial Statements are unaudited but reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of SanDisk Corporation and its subsidiaries (the “Company”) as of September 30, 2012, the Condensed Consolidated Statements of Operations for the three and nine months endedSeptember 30, 2012 and October 2, 2011, the Condensed Consolidated Statements of Comprehensive Income for the three and nine months endedSeptember 30, 2012 and October 2, 2011 and the Condensed Consolidated Statements of Cash Flows for the nine months endedSeptember 30, 2012 and October 2, 2011. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes included in the Company’s most recent Annual Report on Form 10‑K filed with the SEC on February 23, 2012. The results of operations for the three and nine months endedSeptember 30, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year.

Basis of Presentation. The Company’s fiscal year ends on the Sunday closest to December 31, and its fiscal quarters consist of 13 weeks and generally end on the Sunday closest to March 31, June 30, and September 30. The third quarters of fiscal years 2012 and 2011 ended on September 30, 2012 and October 2, 2011, respectively. For accounting and disclosure purposes, the exchange rates of 77.76, 77.17 and 76.78 at September 30, 2012, January 1, 2012 and October 2, 2011, respectively, were used to convert Japanese yen to U.S. dollars. Certain prior period amounts have been reclassified in the footnotes to conform to the current period presentation, including line items within income tax expense (benefit) allocated to accumulated other comprehensive income in Note 4, “Balance Sheet Information.”

Organization and Nature of Operations. The Company was incorporated in Delaware on June 1, 1988. The Company designs, develops, markets and manufactures flash memory storage card products used in a wide variety of consumer electronics products. The Company operates in one segment, flash memory storage products.

Principles of Consolidation. The Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated. Non-controlling interests represent the minority shareholders’ proportionate share of the net assets and results of operations of the Company’s consolidated subsidiaries. The Condensed Consolidated Financial Statements also include the results of companies acquired by the Company from the date of each acquisition.

Use of Estimates. The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. The estimates and judgments affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to customer programs and incentives, intellectual property claims, product returns, inventories and inventory reserves, valuation and impairments of marketable securities and investments, impairments of goodwill and long-lived assets, income taxes, warranty obligations, restructuring, contingencies, share-based compensation and litigation. The Company bases estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of assets and liabilities when those values are not readily apparent from other sources. Actual results could materially differ from these estimates.

Recent Accounting Pronouncements. In July 2012, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance related to the testing of indefinite-lived intangible assets for impairment. The guidance gives an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite-lived asset is impaired. Under the amendments in this update, an entity has the option to bypass the qualitative assessment in any period and proceed directly to the quantitative impairment test. An entity may resume performing the qualitative assessment in any subsequent period. This guidance is effective for interim and annual impairment tests performed for fiscal years beginning after September 15, 2012 with early adoption permitted. The Company expects to early-adopt this guidance in the fourth quarter of fiscal year 2012 for its annual indefinite-lived intangible assets impairment test and does not believe the adoption of this guidance will have a material impact on its Consolidated Financial Statements.

The Company’s total cash, cash equivalents and marketable securities were as follows (in thousands):

September 30, 2012

January 1, 2012

Cash and cash equivalents

$

1,110,485

$

1,167,496

Short-term marketable securities

1,485,584

1,681,492

Long-term marketable securities

2,818,969

2,766,263

Total cash, cash equivalents and marketable securities

$

5,415,038

$

5,615,251

For certain of the Company’s financial instruments, including cash held in banks, accounts receivable and accounts payable, the carrying amounts approximate fair value due to their short maturities, and are therefore excluded from the fair value tables below.

Financial assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following types of instruments (in thousands):

September 30, 2012

January 1, 2012

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Money market funds

$

606,845

$

—

$

—

$

606,845

$

901,500

$

—

$

—

$

901,500

Fixed income securities

22,988

4,451,060

—

4,474,048

214,431

4,312,929

—

4,527,360

Derivative assets

—

6,938

—

6,938

—

21,093

—

21,093

Other

—

—

—

—

—

4,501

—

4,501

Total financial assets

$

629,833

$

4,457,998

$

—

$

5,087,831

$

1,115,931

$

4,338,523

$

—

$

5,454,454

Derivative liabilities

$

—

$

6,759

$

—

$

6,759

$

—

$

45,835

$

—

$

45,835

Total financial liabilities

$

—

$

6,759

$

—

$

6,759

$

—

$

45,835

$

—

$

45,835

Financial assets and liabilities measured and recorded at fair value on a recurring basis were presented on the Company’s Condensed Consolidated Balance Sheets as follows (in thousands):

September 30, 2012

January 1, 2012

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Cash equivalents(1)

$

608,845

$

167,495

$

—

$

776,340

$

926,994

$

54,111

$

—

$

981,105

Short-term marketable securities

15,826

1,469,758

—

1,485,584

155,538

1,525,954

—

1,681,492

Long-term marketable securities

5,162

2,813,807

—

2,818,969

33,399

2,732,864

—

2,766,263

Other current assets and other non-current assets

—

6,938

—

6,938

—

25,594

—

25,594

Total financial assets

$

629,833

$

4,457,998

$

—

$

5,087,831

$

1,115,931

$

4,338,523

$

—

$

5,454,454

Other current accrued liabilities

$

—

$

4,272

$

—

$

4,272

$

—

$

40,045

$

—

$

40,045

Non-current liabilities

—

2,487

—

2,487

—

5,790

—

5,790

Total financial liabilities

$

—

$

6,759

$

—

$

6,759

$

—

$

45,835

$

—

$

45,835

————

(1)

Cash equivalents exclude cash of $334.1 million and $186.4 million included in Cash and cash equivalents on the Condensed Consolidated Balance Sheets as of September 30, 2012 and January 1, 2012, respectively.

During the nine months endedSeptember 30, 2012, the Company had no transfers of financial assets or liabilities between Level 1 and Level 2. As of September 30, 2012 and January 1, 2012, the Company had no financial assets or liabilities categorized as Level 3.

As of September 30, 2012 and January 1, 2012, the Company had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted.

The fair value and gross unrealized losses on the available-for-sale securities that have been in an unrealized loss position, aggregated by type of investment instrument, and the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2012, are summarized in the following table (in thousands). Available-for-sale securities that were in an unrealized gain position have been excluded from the table.

Less than 12 months

Greater than 12 months

Fair Value

Gross Unrealized Loss

Fair Value

Gross Unrealized Loss

U.S. Treasury and government agency securities

$

3,420

$

(1

)

$

—

$

—

U.S. government-sponsored agency securities

28,995

—

—

—

Corporate notes and bonds

66,262

(16

)

7,727

(20

)

Asset-backed securities

6,804

(5

)

—

—

Mortgage-backed securities

1,863

(14

)

—

—

Municipal notes and bonds

101,058

(73

)

17,131

(85

)

Total

$

208,402

$

(109

)

$

24,858

$

(105

)

The gross unrealized loss related to U.S. Treasury and government agency securities, U.S. government-sponsored agency securities, corporate and municipal notes and bonds, and asset-backed and mortgage-backed securities was primarily due to changes in interest rates. The gross unrealized loss on all available-for-sale fixed income securities at September 30, 2012 was considered temporary in nature. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold an investment for a period of time sufficient to allow for any anticipated recovery in market value. For debt security investments, the Company considered additional factors including the Company’s intent to sell the investments or whether it is “more likely than not” the Company will be required to sell the investments before the recovery of its amortized cost.

The following table shows the gross realized gains and losses on sales of available-for-sale securities (in thousands).

Three months ended

Nine months ended

September 30, 2012

October 2, 2011

September 30, 2012

October 2, 2011

Gross realized gains

$

940

$

1,276

$

2,964

$

6,890

Gross realized losses

(52

)

(672

)

(874

)

(882

)

Fixed income securities by contractual maturity as of September 30, 2012 are shown below (in thousands). Actual maturities may differ from contractual maturities because issuers of the securities may have the right to prepay obligations.

Amortized Cost

Fair Value

Due in one year or less

$

1,651,569

$

1,655,079

Due after one year through five years

2,789,522

2,818,969

Total

$

4,441,091

$

4,474,048

For those financial instruments where the carrying amounts differ from fair value, the following table represents the related carrying values and the fair values, which are based on quoted market prices (in thousands). These financial instruments were categorized as Level 1 as of September 30, 2012 and January 1, 2012.

The Company uses derivative instruments primarily to manage exposures to foreign currency. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency. The program is not designated for trading or speculative purposes. The Company’s derivatives expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks to mitigate such risk by limiting its counterparties to major financial institutions and by spreading the risk across several major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored by the Company on an ongoing basis.

The Company recognizes derivative instruments as either assets or liabilities on the balance sheet at fair value and provides qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. Changes in fair value (i.e., gains or losses) of the derivatives are recorded as cost of product revenues or other income (expense), or as accumulated other comprehensive income (“OCI”). The Company does not offset or net the fair value amounts of derivative instruments and separately discloses the fair value amounts of the derivative instruments as either assets or liabilities.

Cash Flow Hedges. The Company uses forward contracts designated as cash flow hedges to hedge a portion of future forecasted purchases in Japanese yen. The gain or loss on the effective portion of a cash flow hedge is initially reported as a component of accumulated OCI and subsequently reclassified into cost of product revenues in the same period or periods in which the cost of product revenues is recognized, or reclassified into other income (expense) if the hedged transaction becomes probable of not occurring. Any gain or loss after a hedge is no longer designated because it is no longer probable of occurring or it is related to an ineffective portion of a cash flow hedge, as well as any amount excluded from the Company’s hedge effectiveness, is recognized as other income (expense) immediately. As of September 30, 2012, the Company had forward contracts in place to hedge future purchases over the next twelve months of 26.3 billion Japanese yen, or approximately $338 million based upon the exchange rate as of September 30, 2012, and the net unrealized gain on the effective portion of these cash flow hedges was $2.9 million. As of September 30, 2012, the Company had no forward contracts in place to hedge future purchases beyond the next twelve months.

Other Derivatives. Other derivatives that are non-designated consist primarily of forward and cross currency swap contracts to minimize the risk associated with the foreign exchange effects of revaluing monetary assets and liabilities. Monetary assets and liabilities denominated in foreign currencies and the associated outstanding forward and cross currency swap contracts were marked-to-market at September 30, 2012 with realized and unrealized gains and losses included in other income (expense). As of September 30, 2012, the Company had foreign currency forward contracts hedging exposures in European euros, British pounds and Japanese yen. Foreign currency forward contracts were outstanding to buy and sell U.S. dollar equivalents of approximately $230 million and $143 million in foreign currencies, respectively, based upon the exchange rates at September 30, 2012.

The Company currently has cross currency swap contracts with various counterparties to exchange Japanese yen for U.S. dollars that require the Company to comply with certain covenants, the strictest of which is to maintain a minimum liquidity of $1.0 billion. Liquidity is defined as the sum of the Company’s cash and cash equivalents and short and long-term marketable securities. These cross currency swap contracts were outstanding to sell U.S. dollar equivalents of approximately $185 million based upon the exchange rates at September 30, 2012. Should the Company fail to comply with these covenants, the Company may be required to settle the unrealized gain or loss on the foreign exchange contracts prior to the original maturity date. The Company was in compliance with these covenants as of September 30, 2012.

The amounts in the tables below include fair value adjustments related to the Company’s own credit risk and counterparty credit risk.

Fair Value of Derivative Contracts. Fair value of derivative contracts as of September 30, 2012 and January 1, 2012 were as follows (in thousands):

Derivative assets reported in

Other Current Assets

Other Non-current Assets

September 30, 2012

January 1, 2012

September 30, 2012

January 1, 2012

Designated cash flow hedges

Foreign exchange contracts

$

4,149

$

14,890

$

—

$

—

4,149

14,890

—

—

Foreign exchange contracts not designated

2,789

6,203

—

—

Total derivatives

$

6,938

$

21,093

$

—

$

—

Derivative liabilities reported in

Other Current Accrued Liabilities

Non-current Liabilities

September 30, 2012

January 1, 2012

September 30, 2012

January 1, 2012

Designated cash flow hedges

Foreign exchange contracts

$

1,243

$

3,265

$

—

$

—

1,243

3,265

—

—

Foreign exchange contracts not designated

3,029

36,780

2,487

5,790

Total derivatives

$

4,272

$

40,045

$

2,487

$

5,790

Foreign Exchange and Equity Market Risk Contracts Designated as Cash Flow Hedges. The impact of the effective portion of designated cash flow derivative contracts on the Company’s results of operations for the three and nine months endedSeptember 30, 2012 and October 2, 2011 was as follows (in thousands):

Three months ended

Nine months ended

Amount of gain recognized in OCI

Amount of gain (loss) reclassified from OCI to earnings

Amount of gain (loss) recognized in OCI

Amount of gain (loss) reclassified from OCI to earnings

September 30, 2012

October 2, 2011

September 30, 2012

October 2, 2011

September 30, 2012

October 2, 2011

September 30, 2012

October 2, 2011

Foreign exchange contracts

$

11,239

$

21,617

$

(11,184

)

$

7,386

$

(27,681

)

$

21,338

$

(6,399

)

$

11,933

Equity market risk contract

—

5,246

—

—

—

8,950

—

—

Foreign exchange contracts designated as cash flow hedges relate primarily to wafer purchases in Japanese yen. Gains and losses associated with foreign exchange contracts designated as cash flow hedges are expected to be recorded in cost of product revenues when reclassified out of accumulated OCI. Losses from the equity market risk contract were recorded in other income (expense) when reclassified out of accumulated OCI. The Company expects to realize the majority of the accumulated OCI balance related to foreign exchange contracts within the next twelve months.

The following table includes the ineffective portion of designated cash flow derivative contracts and the forward points excluded for the purposes of cash flow hedging designation recognized in other income (expense) (in thousands):

Three months ended

Nine months ended

September 30, 2012

October 2, 2011

September 30, 2012

October 2, 2011

Foreign exchange contracts

$

(1,136

)

$

(584

)

$

(6,382

)

$

(3,025

)

Effect of Non-Designated Derivative Contracts on the Condensed Consolidated Statements of Operations. The effect of non-designated derivative contracts on the Company’s results of operations recognized in other income (expense) was as follows (in thousands):

Three months ended

Nine months ended

September 30, 2012

October 2, 2011

September 30, 2012

October 2, 2011

Gain (loss) on foreign exchange contracts including forward point income

The Company assesses financing receivable credit quality through financial and operational reviews of the borrower and creditworthiness, including credit rating agency ratings, of significant investors of the borrower, where material or known. Impairments, when required, are recorded in other income (expense). The Company makes or will make long-term loans to Flash Ventures to fund new process technologies and additional wafer capacities. The Company aggregates its Flash Ventures notes receivable into one class of financing receivables due to the similar ownership interest and common structure in each Flash Ventures entity. For all reporting periods presented, no loans were past due and no loan impairments were recorded.

Other Non-Current Assets. Other non-current assets were as follows (in thousands):

September 30, 2012

January 1, 2012

Prepaid tax onintercompany transactions

$

43,211

$

46,489

Prepayment to Flash Forward Ltd.

10,289

29,396

Convertible note issuance costs

9,179

12,992

Long-term prepaid income tax

63,008

3,956

Other non-current assets

29,479

29,782

Total other non-current assets

$

155,166

$

122,615

Other Current Accrued Liabilities. Other current accrued liabilities were as follows (in thousands):

Warranties. The liability for warranty expense is included in Other current accrued liabilities and Non-current liabilities in the accompanying Condensed Consolidated Balance Sheets and the activity was as follows (in thousands):

The majority of the Company’s products have a warranty of less than three years, with a small number of products having a warranty ranging up to ten years or more. For 100-year or lifetime warranties, the Company uses the estimated useful life of the product to calculate the warranty exposure. A provision for the estimated future cost related to warranty expense is recorded at the time of customer invoice. The Company’s warranty liability is affected by customer and consumer returns, product failures, number of units sold and repair or replacement costs incurred. Should actual product failure rates, or repair or replacement costs, differ from the Company’s estimates, increases or decreases to its warranty liability would be required.

Accumulated Other Comprehensive Income. Accumulated other comprehensive income presented in the accompanying Condensed Consolidated Balance Sheets consists of unrealized gains and losses on available-for-sale investments, foreign currency translation and hedging activities, net of tax, for all periods presented (in thousands):

September 30, 2012

January 1, 2012

Accumulated net unrealized gain (loss) on:

Available-for-sale investments

$

21,060

$

10,849

Foreign currency translation

294,679

300,788

Hedging activities

(219

)

21,064

Total accumulated other comprehensive income

$

315,520

$

332,701

The amount of income tax expense (benefit) allocated to available-for-sale investments, foreign currency translation and hedging activities was as follows (in thousands):

Goodwill increased by $43.0 million due to the Company’s acquisition of 100% of the outstanding shares of FlashSoft Corporation (“FlashSoft”) on February 13, 2012 and Schooner Information Technology, Inc. (“Schooner”) on June 21, 2012. In addition, during the three months endedSeptember 30, 2012, the Company recognized $3.9 million of goodwill under an achieved earn-out provision related to an acquisition consummated in fiscal year 2004.

FlashSoft is a provider of software caching solutions that enable flash-based products to be configured as high-performance cache. The acquisition of FlashSoft adds software caching solutions to the Company’s growing portfolio of enterprise storage solutions. The goodwill resulted from expected synergies from the transaction, including the Company’s resources and complementary products, and is not deductible for tax purposes. The preliminary estimates of fair value for the liabilities assumed from the acquisition are subject to change as the Company obtains additional information related to certain legal contingency matters during the measurement period (up to one year from the acquisition date).

Schooner is an enterprise software company that develops flash-optimized database and data store solutions. Schooner’s products complement the Company’s growing portfolio of enterprise storage solutions and flash-optimized software offerings that enable customers to accelerate the performance of data-intensive applications and reduce overall cost of ownership. The goodwill resulted from expected synergies from the transaction, including the Company’s resources and complementary products, and is not deductible for tax purposes. The preliminary estimates of fair value for the liabilities assumed from the acquisition are subject to change as the Company obtains additional information related to certain legal contingency matters during the measurement period (up to one year from the acquisition date).

Acquisition-related intangible assets increased in the nine months endedSeptember 30, 2012 due to the acquisitions of FlashSoft and Schooner. During the three months endedSeptember 30, 2012, the Company reclassified $0.7 million of acquired in-process research and development to core technology and commenced amortization.

The annual expected amortization expense of intangible assets as of September 30, 2012, excluding acquired in-process research and development, is presented below (in thousands):

The following table reflects the carrying value of the Company’s convertible debt (in thousands):

September 30, 2012

January 1, 2012

1% Notes due 2013

$

928,061

$

928,061

Less: Unamortized interest discount

(35,377

)

(75,915

)

Net carrying amount of 1% Notes due 2013

892,684

852,146

1.5% Notes due 2017

1,000,000

1,000,000

Less: Unamortized interest discount

(219,536

)

(247,235

)

Net carrying amount of 1.5% Notes due 2017

780,464

752,765

Total convertible debt

1,673,148

1,604,911

Less: Convertible short-term debt

(892,684

)

—

Convertible long-term debt

$

780,464

$

1,604,911

1% Convertible Senior Notes Due 2013. In May 2006, the Company issued and sold $1.15 billion in aggregate principal amount of 1% Convertible Senior Notes due May 15, 2013 (the “1% Notes due 2013”) at par and has subsequently repurchased $221.9 million of principal amount of these notes. The 1% Notes due 2013 may be converted, under certain circumstances, based on an initial conversion rate of 12.1426 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $82.36 per share). The net proceeds to the Company from the offering of the 1% Notes due 2013 were $1.13 billion. As of September 30, 2012, the Company had $928.1 million outstanding in aggregate principal amount at par.

The Company separately accounts for the liability and equity components of the 1% Notes due 2013. The principal amount of the liability component of $753.5 million as of the date of issuance was recognized at the present value of its cash flows using a discount rate of 7.4%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. The carrying value of the equity component was $394.3 million as of September 30, 2012 and January 1, 2012.

The following table presents the amount of interest cost recognized relating to the contractual interest coupon, amortization of bond issuance costs and amortization of the discount on the liability component of the 1% Notes due 2013 (in thousands):

Three months ended

Nine months ended

September 30, 2012

October 2, 2011

September 30, 2012

October 2, 2011

Contractual interest coupon

$

2,319

$

2,504

$

6,959

$

8,254

Amortization of bond issuance costs

695

1,935

2,087

3,649

Amortization of bond discount

13,515

13,456

39,816

43,743

Total interest cost recognized

$

16,529

$

17,895

$

48,862

$

55,646

The effective interest rate on the liability component of the 1% Notes due 2013 was 7.4% for each of the three and nine months endedSeptember 30, 2012 and October 2, 2011. The remaining bond discount of $35.4 million as of September 30, 2012 will be amortized over the remaining life of the 1% Notes due 2013, which is approximately 0.6 years.

Concurrent with the issuance of the 1% Notes due 2013, the Company sold warrants to acquire shares of its common stock at an exercise price of $95.03 per share. Due to the repurchase of a portion of the outstanding 1% Notes due 2013 in fiscal year 2011, the Company unwound a pro-rata portion of the warrants. The counterparties may now purchase up to 11.3 million shares of the Company’s common stock at an exercise price of $95.03 per share. As of September 30, 2012, the warrants had an expected life of approximately 0.9 years and will expire on 20 different dates from August 23, 2013 through September 20, 2013. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of September 30, 2012, the remaining warrants had not been exercised and remain outstanding. In addition, at issuance, counterparties agreed to sell to the Company up to approximately 14.0 million shares of its common stock, which is the number of shares initially

issuable upon conversion of the 1% Notes due 2013 in full, at a conversion price of $82.36 per share. Due to the repurchase of a portion of the outstanding 1% Notes due 2013 in fiscal year 2011, the Company unwound a pro-rata portion of the convertible bond hedge. The Company may now purchase up to 11.3 million shares of its common stock at a conversion price of $82.36 per share. This convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1% Notes due 2013 or the first day that none of the 1% Notes due 2013 remain outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net shares on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by it upon conversion of the 1% Notes due 2013. As of September 30, 2012, the Company had not purchased any shares under the remaining convertible bond hedge agreement.

1.5% Convertible Senior Notes Due 2017. In August 2010, the Company issued and sold $1.0 billion in aggregate principal amount of 1.5% Convertible Senior Notes due August 15, 2017 (the “1.5% Notes due 2017”) at par. The 1.5% Notes due 2017 may be converted, under certain circumstances described below, based on an initial conversion rate of 19.0931 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $52.37 per share). The net proceeds to the Company from the sale of the 1.5% Notes due 2017 were $981.0 million.

The Company separately accounts for the liability and equity components of the 1.5% Notes due 2017. The principal amount of the liability component of $706.0 million as of the date of issuance was recognized at the present value of its cash flows using a discount rate of 6.85%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. The carrying value of the equity component was $294.0 million as of September 30, 2012, unchanged from the date of issuance.

The following table presents the amount of interest cost recognized relating to the contractual interest coupon, amortization of bond issuance costs and amortization of the discount on the liability component of the 1.5% Notes due 2017 (in thousands):

Three months ended

Nine months ended

September 30, 2012

October 2, 2011

September 30, 2012

October 2, 2011

Contractual interest coupon

$

3,750

$

3,750

$

11,250

$

11,250

Amortization of bond issuance costs

667

667

2,000

2,028

Amortization of bond discount

9,170

8,594

27,111

25,505

Total interest cost recognized

$

13,587

$

13,011

$

40,361

$

38,783

The effective interest rate on the liability component of the 1.5% Notes due 2017 was 6.85% for each of the three and nine months endedSeptember 30, 2012 and October 2, 2011. The remaining unamortized interest discount of $219.5 million as of September 30, 2012 will be amortized over the remaining life of the 1.5% Notes due 2017, which is approximately 4.9 years.

Concurrent with the issuance of the 1.5% Notes due 2017, the Company sold warrants to acquire shares of its common stock at an exercise price of $73.33 per share. As of September 30, 2012, the warrants had an expected life of approximately 5.2 years and will expire on 40 different dates from November 13, 2017 through January 10, 2018. At each expiration date, the Company may, at its option, elect to settle the warrants on a net share basis. As of September 30, 2012, the warrants had not been exercised and remain outstanding. In addition, counterparties agreed to sell to the Company up to approximately 19.1 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the 1.5% Notes due 2017 in full, at a price of $52.37 per share. This convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1.5% Notes due 2017 or the first day that none of the 1.5% Notes due 2017 remain outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net shares on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 1.5% Notes due 2017. As of September 30, 2012, the Company had not purchased any shares under this convertible bond hedge agreement.

During the fourth quarter of fiscal year 2011, the Company’s Board of Directors authorized the repurchase of up to $500.0 million of the Company’s outstanding common stock over a period of up to five years. Under this program, shares repurchased are recorded as a reduction to capital in excess of par value and retained earnings in the Company’s Condensed Consolidated Balance Sheet. Since the inception of this stock repurchase program, the Company has repurchased 4.8 million shares for $195.5 million, of which 4.7 million shares for an aggregate purchase price of $191.5 million were repurchased during the nine months endedSeptember 30, 2012. As part of its share repurchase program, the Company may from time-to-time enter into structured share repurchase arrangements with financial institutions. These arrangements generally require the Company to make an upfront cash payment in exchange for the right to receive shares of its common stock or cash at the expiration of the agreement, dependent upon the volume-weighted average price of the Company’s common stock at the expiration date. The initial cash principal payment, as well as the subsequent repayment of principal and return on principal, if settled in cash, are recorded as a component of capital in excess of par value in the Company’s Condensed Consolidated Balance Sheet. During the nine months endedSeptember 30, 2012, the Company entered into structured share repurchase arrangements that required upfront cash payments of $40.0 million. These arrangements settled within the nine months endedSeptember 30, 2012 and resulted in zero stock repurchases and the Company receiving its original upfront cash payment of $40.0 million and returns totaling $2.7 million. As of September 30, 2012, the Company had $304.5 million available for usage under this share repurchase program.

Share-based Plans. The Company has a share-based compensation program that provides its Board of Directors with broad discretion in creating equity incentives for employees, officers, non-employee board members and non-employee service providers. This program includes incentive and non-statutory stock option awards, stock appreciation right awards, restricted stock unit awards, performance-based cash bonus awards for Section 16 executive officers and an automatic grant program for non-employee board members pursuant to which such individuals will receive option grants or other stock awards at designated intervals over their period of board service. These awards are granted under various programs, all of which are stockholder approved. Stock option awards generally vest as follows: 25% of the shares vest on the first anniversary of the vesting commencement date and the remaining 75% vest proportionately each quarter over the next 12 quarters of continued service. Restricted stock unit awards generally vest in equal annual installments over a 4-year period. Initial grants to non-employee board members under the automatic grant program vest in equal annual installments over a 4-year period and subsequent grants to non-employee board members generally vest over a 1-year period in accordance with the specific vesting provisions set forth in that program. Additionally, the Company has an Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase shares of common stock at 85% of the fair market value at the subscription date or the date of purchase, whichever is lower.

FlashSoft Corporation Amended and Restated 2011 Equity Plan. The FlashSoft Corporation Amended and Restated 2011 Equity Plan was assumed pursuant to the Company’s acquisition of FlashSoft on February 13, 2012. Unvested restricted stock unit awards that were outstanding under this plan on February 13, 2012 were assumed by the Company and are governed by the existing terms of the plan. Restricted stock unit awards granted under this plan generally vest in equal annual installments over a 4-year period.

Valuation Assumptions

Option Plan Shares. The fair value of the Company’s stock options granted to employees, officers and non-employee board members was estimated using the following weighted average assumptions:

Three months ended

Nine months ended

September 30, 2012

October 2, 2011

September 30, 2012

October 2, 2011

Dividend yield

None

None

None

None

Expected volatility

0.45

0.42

0.43

0.42

Risk-free interest rate

0.51%

0.80%

0.60%

1.52%

Expected term

4.3 years

4.3 years

4.3 years

4.2 years

Estimated annual forfeiture rate

8.59%

8.57%

8.59%

8.57%

Weighted average fair value at grant date

$15.39

$13.99

$16.63

$17.72

Employee Stock Purchase Plan Shares. The fair value of the Company’s ESPP shares issued to employees was estimated using the following weighted average assumptions:

Stock Options and SARs. A summary of stock option and stock appreciation rights (“SARs”) activity under all of the Company’s share-based compensation plans as of September 30, 2012 and changes during the nine months ended September 30, 2012 is presented below (in thousands, except for weighted average exercise price and remaining contractual term):

Shares

Weighted Average Exercise Price

Weighted Average Remaining Contractual Term (Years)

Aggregate Intrinsic Value

Options and SARs outstanding at January 1, 2012

17,559

$

36.55

3.4

$

257,251

Granted

2,171

46.82

Exercised

(2,853

)

22.42

66,663

Forfeited

(275

)

36.28

Expired

(235

)

52.82

Options and SARs outstanding at September 30, 2012

16,367

40.15

3.3

130,753

Options and SARs vested and expected to vest after September 30, 2012, net of forfeitures

15,797

40.00

3.2

129,132

Options and SARs exercisable at September 30, 2012

10,878

39.71

2.2

99,862

At September 30, 2012, the total compensation cost related to stock options granted to employees under the Company’s share-based compensation plans but not yet recognized was approximately $78.1 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.5 years.

Restricted Stock Units. Restricted stock units (“RSUs”) are settled in shares of the Company’s common stock upon vesting on a one-for-one basis. Typically, vesting of RSUs is subject to the employee’s continuing service to the Company. The cost of these awards is determined using the fair value of the Company’s common stock on the date of grant, and compensation is recognized on a straight-line basis over the requisite vesting period.

A summary of the changes in RSUs outstanding under the Company’s share-based compensation plans during the nine months ended September 30, 2012 is presented below (in thousands, except for weighted average grant date fair value):

Shares

Weighted Average Grant Date Fair Value

Aggregate Intrinsic Value

Non-vested share units at January 1, 2012

2,051

$

40.22

$

100,913

Granted

1,697

45.25

Vested

(640

)

47.82

29,227

Forfeited

(144

)

42.54

Assumed through acquisition

59

46.63

Non-vested share units at September 30, 2012

3,023

42.74

131,307

As of September 30, 2012, the Company had approximately $92.9 million of unrecognized compensation expense, net of estimated forfeitures, related to RSUs, which will be recognized over a weighted average estimated remaining life of 2.9 years.

Employee Stock Purchase Plan. At September 30, 2012, there was approximately $2.4 million of total unrecognized compensation cost related to the Company’s ESPP that is expected to be recognized over a period of approximately 0.4 years.